United States: Complying With U.S. Tax Evasion Law Is Vexing Foreign Banks

A sweeping new federal law has a seemingly simple goal — curbing offshore tax evasion by Americans through foreign banks, trusts and shell companies. But behind the scenes, foreign banks and financial firms are increasingly finding that complying with the law is a major headache.

Treasury Department officials say they are moving apace in getting the world’s banks on board with the law, the Foreign Account Tax Compliance Act. They say they have reached agreements with some large countries, are working on deals with others and are refining parts of the law, which is set to take effect on June 30, 2014.

But some financial institutions, trade groups, scholars and members of Congress have raised an array of concerns, starting with the cost of creating the complex computer systems needed to track Americans’ accounts.

In addition, tax havens like China, Panama and Russia have yet to sign on. And American banks are unhappy about a Treasury Department pledge to foreign banks, not part of the original law, to require American financial institutions to share data with other countries about foreign investors who have accounts in the United States.

"You can search a long time for comments from the private sector or other governments singing the praises” of the law, said Mark E. Matthews, a tax lawyer at Caplin & Drysdale in Washington, and a former deputy commissioner of the Internal Revenue Service. "It’s all criticism, and that speaks volumes about the challenges.”

Still, even the critics acknowledge that they cannot stop the law, which aims to become a model for global finance rules, from going into effect. The question is whether all the global financial institutions will comply equally.

The law, known informally as Fatca, effectively makes all foreign banks and foreign financial institutions arms of the I.R.S. by requiring them to disclose data on American clients with accounts containing at least $50,000, or to withhold 30 percent of the dividend, interest and other payments due those clients and to send that money to the I.R.S. The law applies to banks and financial institutions even if their home countries have secrecy laws. Those that do not comply could face significant fines or be locked out of doing business with American clients.

Robert B. Stack, deputy assistant secretary for international tax affairs at Treasury, described the law as a success. "We have worked very closely with financial institutions to come up with a practical, risk-based approach that balances benefits and burdens,” he said in an e-mail. "We think those efforts have paid off.”

Pascal Saint-Amans, director of the Organization for Economic Cooperation and Development’s Center for Tax Policy and Administration, called the regulation "a reality,” adding that "all countries support its underlying policy goals.”

But global banks and investment firms have made their dislike of the law known, though they are reluctant to speak out individually.

Payson Peabody, managing director and tax counsel at the Securities Industry and Financial Markets Association, Wall Street’s main lobbying group, said, "The goals are laudable, but there’s the risk of a train wreck” if some countries and banks do not comply.

Another critic is Georges Ugeux, a dual Belgian-American citizen, a lecturer at Columbia Law School and the founder of Galileo Global Advisors, an international business consulting firm. He described the law as "bullying and selfish.” The United States, he said, "is acting outside its borders as if they were its home.”

Mr. Ugeux also questioned the fact that the law addresses only tax evasion by individuals and not by corporations.

WHY REGISTER WITH SAIT?

Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.